India’s illegal wealth abroad is not just an issue of tax evasion

Though not a part of the UPA government’s agenda for the first 100 days, the issue of illegal money in tax havens like Switzerland has fortunately not been brushed under the carpet post-elections.

The finance ministry has indicated it is taking steps to recover the amounts and also said the government of Germany has given a list of names of those whose money is lying in the LGT Bank of Liechtenstein. The response also shows steps have been taken in the case of Pune stud farm owner Hasan Ali Khan’s illegal transactions through the UBS Bank of Switzerland.

Interestingly, the response of the Union government in the SC indicates that tax demands of Rs 71,848 crore have been raised against the said person, his wife and other associates. If this were the tax demand, the income on which it is raised may be more than Rs 1.5 lakh crore, taking into account compounding, penalty etc. This is a mind-boggling figure, given that our national income for this year is about Rs 50 lakh crore. But something more interesting has been reported.

“Swiss authorities told an Indian news magazine that Indian authorities submitted in the case of Hassan Ali Khan, who has a Swiss bank account, a request in January 2007 for legal assistance to the Federal Office of Justice. Swiss authorities, upon domestic inquiry, found that the banking information provided with the request for legal assistance contained ‘forged documents’.

Swiss authorities want to provide further assistance in that case if the Indian authorities could satisfy the Swiss government’s demand to establish dual criminality — what is crime in India is a crime in Switzerland. The Swiss also wanted to know whether the offence was an object of Indian money-laundering. Since April 2007, the Indian government has not responded,” it was reported.

The Indian government says it cannot disclose the names provided by Germany as they have been obtained under the Double Taxation Treaty but it has initiated proceedings against the accountholders under tax laws.

This begs the question — why did the government of India ask information under the Double Taxation Treaty when the LGT Bank issue doesn’t have any link to that? Besides, where is the question of confidentiality when dealing with criminals? Germany has released its own list; how then is it asking India not to release it?

A report in a financial daily said out of 50 names in the LGT Bank list, 25 were from Mumbai, none being big industrialists or well-known individuals. Not surprising — big industrialists and politicians will hardly hold these accounts under their names.

They will be under benami names. Tax authorities have reopened the assessment of all the 25 tax evaders under section 148 of the Income Tax Act. This implies that the government is treating the case only as tax evasion and not as capital flight and corruption. These are international crooks that have deprived India of huge resources by capital flight. This can be equated with financial terrorism.

Tax havens are against transparency. There are concerns that a lot of money is being generated through bribery, receipt of kickbacks, drug-backs, drug-trafficking, insider trading, embezzlement, computer fraud, under invoicing, and other scams, all of which have a major impact on common people.

Ill-gotten money can be laundered through companies floated in tax havens. If a terror outfits decides to transfer resources to India from Monaco or Luxemburg, or some of the islands in the Caribbean Sea, or some dot-like country in Micronesia or Polynesia, it can adopt a simple strategy. Its investment manager can structure some device or product for transferring resources into the target country, maybe through a subsidiary or a conduit company in a tax haven.

Some check was being done when income tax authorities investigated the cases of the non-residents to see the profile of the real operators and beneficiaries to prevent persons of the third states from taking advantage of bilateral treaties. The effect of Circular No. 789, issued by the Central Board of Direct Taxes in 2000, is to subvert this check. The circular made the Certificate of Residence granted by a tax haven government conclusive for two things
(i) the authenticity of the fact of residency
(ii) the beneficial ownership of income

Due to the mandatory directive, income tax authorities won’t be able to know the real operators and income earners. Terrorism can flourish under such circumstances. Those who issued this circular didn’t seem to have thought they were unwittingly facilitating terrorism and anti-India activities.

It was recently reported that Citibank was told to suspend retail sales over money-laundering in Japan. It was suspected that the bank has allowed ‘anti-social’ bodies to open several hundred accounts. Recently, the US media reported on Saudi money being used to finance terror outfits in Bosnia and Pakistan possibly using tax havens as conduits. These should make us much more alert as we are the worst-affected by terrorism.

India should move the UN Security Council and other multilateral bodies to close these tax jurisdictions. The sooner, the better.